The OBR brought welcome news (and money) to the Chancellor at the Budget by lowering its underlying borrowing forecast. This allowed the Chancellor to announce measures that increase spending and lower taxes while still borrowing a little less than the OBR forecast in its previous March 2018 forecast.

Here we look at why the underlying improvement was widely expected, what the OBR’s underlying forecast is and how it has changed, and how the Chancellor has responded to the improved situation.

Why was the improvement expected?

Government borrowing has turned out to be lower over the first half of 2018/19 than expected by the OBR back in March. Many experts thought that this improvement would be reflected in the OBR’s revised forecast for the whole of 2018/19.

Cumulative borrowing in 2018/19 is lower than in 2017/18. Half way through the year cumulative borrowing in 2018/19 is 35% lower than in 2017/18

Much of the improvement in the first half of 2018/19 is a result of stronger than expected growth in tax revenues. Personal tax receipts, corporation tax revenue, VAT and alcohol duties are all performing better in 2018/19 than the OBR anticipated. Some areas of government spending – most notably on debt interest – have been lower than expected.

This positive data strongly suggested that the OBR would lower its borrowing forecast for the whole financial year. Some experts thought that part of the improvement in borrowing was due to permanent factors, rather than temporary ones, which would see the improvements feeding through into subsequent years of the OBR’s forecast.

What is the OBR’s underlying forecast? How has it changed?

Ahead of the Budget the OBR updates its borrowing forecast using the latest data on the economy and the public finances. It does this before the impact of the measures announced by the Chancellor in the Budget are included. This “pre-measures forecast” is the underlying forecast.

The OBR’s underlying borrowing forecast has decreased in all forecast years, by an average of £14 billion per year.

OBR has revised it underlying borrowing forecast by an average of £14 billion a year between 2018/19 and 2022/23. Over 60% of the improvement is put down to revisions to receipts.

The OBR put much of the improvement in its underlying forecast down to stronger performance from personal taxes, corporation tax and VAT. As discussed above, revenues from these taxes have increased faster than expected so far in 2018/19 and the OBR expects the improvement to persist over subsequent years. The strength in the income generated by these taxes lowers underlying borrowing by around £7 billion a year.

The OBR has also changed an assumption it makes about unemployment in the long run, which also lowers borrowing. The OBR now assumes that the UK economy can sustain a lower rate of unemployment. This both increases tax receipts by around £2.5 billion a year – as more taxes can be raised from employees – and lowers the amount government spends on out-of-work welfare and tax credits by around £0.5 billion a year.

What has the Chancellor done with the additional borrowing capacity?

He has spent it. Once the Chancellor’s spending and tax measures are added in borrowing, in the years after 2018/19, is fairly similar to the OBR’s March 2018 forecast. Much of the additional borrowing added by the Chancellor covers the Government’s pre-announced pledge to increase NHS funding.

The OBR's October 2018 borrowing forecast was close to its March forecast once the Chancellor's measures were added

The Chancellor’s overall objective for the public finances is reaching a budget surplus – eliminating borrowing – by 2025. The OBR’s underlying forecast would have seen this being achieved in 2023/24, but the measures announced by the Chancellor in the Budget mean that the OBR forecast borrowing of around £20 billion in 2023/24. On this basis, the OBR continue to say, as in previous forecasts, that reaching a budget surplus looks challenging.

Wow, a whole blog and no mention of Brexit?

Not quite. The OBR’s forecast assume that the UK-EU negotiations “lead to an orderly transition to a new long-term relationship, whatever that relationship may be”.  If the UK’s exit turns out to be less orderly than assumed – perhaps the UK leaving the EU without a deal – then it seems likely that the outlook for the economy and public finances will be gloomier than currently forecast. The OBR says that a disorderly exit “could have severe short-term implications for the economy, the exchange rate, asset prices and the public finances”.

In his speech the Chancellor chose to look at it another way. He said that if the UK reaches a deal, the ending of uncertainty could bring a boost to the economy and a ‘deal dividend’ to the public finances.

The Library will publish a summary of Autumn Budget 2018 in the evening of 29 October.

Matt Keep is a statistical researcher specialising in the public finances at the House of Commons Library.

Picture credit: Autumn colours at Westminster by Manish Prabhune.  Licensed by CC BY 2.0 / image cropped.